The HP-Compaq Merger: Partners Reflect 10 Years Later

When HP and Compaq announced a $25 billion merger agreement 10 years ago this week on Sept. 3, 2001, it shocked the industry and sent apprehension and anxiety rippling through the channel as naysayers predicted a very painful and even disastrous integration.

Big technology mergers weren't thought of very fondly by the channel, and many HP and Compaq partners were fearful the proposed merger would put both IT vendors in jeopardy and also cause a major disruption to VARs' businesses. Channel partners weren't the only ones concerned; the value of the deal fell $5 billion the day after the announcement as investors soured on the news.

But fast-forward a decade, and solution providers say the historic merger was a surprising success and ultimately helped their businesses. And the bold move ultimately produced what the two companies promised – a worldwide technology powerhouse with top revenue positions in servers, PC and printers (go here for the official HP-Compaq merger press release).

"You look back now, and Carly [Fiorina, former HP CEO] was right – there was a lot of synergy between the two companies," Tommy Wald, CEO of White Glove Technologies in Austin, Texas, said. "The merger worked out well in retrospect. I think they turned the combined company into a strong channel company, which is what we were all concerned about as partners."

Wald was one of many HP/Compaq partners who, at the time, were skeptical of the move. Wald's company Riata Technologies (which merged with White Glove Technologies in 2010) was a loyal Compaq partner, and Wald didn't want to see his top vendor become part of HP. He was greatly concerned about the potential disruption in the channel, too.

Some of those fears were realized; Wald said the taxing Compaq integration negatively impacted Riata's business as HP struggled to find the right channel strategy for the combined company. "HP started taking Dell's approach and began selling more direct, which gave us some heartburn," Wald said.

But after the integration was completed, Wald said HP refined its partner program and increased support for its enterprise product lines. "That's when we saw the real potential," Wald said. "Eventually HP pulled back from that direct sales push and really listened to partners. To their credit, the folks at HP continued to invest in the channel and in the relationships with partners."

HP said the merger paved the way for it to become the No. 1 IT company in the world.

"The combination of HP and Compaq built a business that achieved more together much faster than either company could on its own and built the foundation for the world’s largest technology company," HP said in a statement to CRN.

Fiorina and Michael Capellas, the head of Compaq at the time of the merger, could not be reached for comment.

Don Richie, CEO of Sequel Data Systems in Austin, Texas, was another partner who was highly skeptical of the move. He admits that when he heard the announcement that day, he was in "a state of panic" and feared the merger would be a disaster. A Compaq partner prior to the merger, Richie said the memories of another big IT merger were fresh in his mind. "We had just gone through the Digital Equipment merger, and that was very painful," he said.

But his fears began to erode slowly as HP began to integrate Compaq. In particular, Richie said he was impressed with how the two companies assimilated their respective partner programs into a combined effort that worked for both sets of partners. "In retrospect, yes, it was a good move for HP and for the partner community," Richie said. "I was wrong, and I'm glad they proved me wrong."

NEXT: Benefits of the HP-Compaq Merger

Looking back at the historic merger, partners say one of the biggest pluses – if not the biggest – was the enterprise focus Compaq brought to HP.

Geoffrey Lilien, president of Lilien Systems in Mill Valley, Calif., was one of the few partners at the time who favored the merger. A longtime HP partner, Lilien believed the addition of Compaq would make HP stronger, especially in the enterprise market.

It was a risky bet for Lilien Systems , an HP Elite partner that did most of its sales with the vendor. Like many solution providers, Lilien's company saw revenue fall during the 2002 recession, and if the merger didn't succeed, it could have had devastating consequences.

But Lilien said the addition of Compaq vastly improved HP's presence in storage and industry-standard servers, which in turn helped his business grow into a nearly $40 million solution provider today. "I think it was a fantastic move," Lilien said. "I thought it was a fantastic move at the time, too. HP would definitely not be where it is today without Compaq."

Richie said the merger exposed Sequel Data Systems to new products -- and also opened his eyes to existing ones. Richie built a successful practice around HP StorageWorks products, which helped the solution provider increase sales during the merger integration and eventually reach annual revenue of more than $30 million. While StorageWorks was a Compaq product line, it was HP that made storage a priority during the integration and promoted the technology to channel partners like Sequel Data Systems.

It wasn't just Compaq's enterprise technology, either. Some solution providers believe the merger deal was more like Compaq buying HP because Compaq's sales approach and enterprise focus also became dominant. "I think you definitely saw more of Compaq's culture taking over at HP," Wald said.

Lilien agrees, saying the Compaq merger fundamentally changed how HP went to market. "It was more of Compaq acquiring HP in terms of the overall sales strategy and philosophy," he said.

A hidden benefit of the merger, according to partners, was that the merger enabled partners that preferred to stay vendor-exclusive to grow their line cards without having to sign up with additional vendors. "The merger allowed us to get into new ventures and new product lines without breaking my golden rule, which is to stick with one vendor," Richie said.

Jane Cage, COO of Heartland Technology Solutions , an HP Elite partner in Joplin, Mo., said that while the Compaq integration caused some issues in the channel, the merger ultimately made life easier for her company. "The merger turned out to be a good thing for us because we got a bigger line card and expanded our products but still got to deal with one vendor instead of three or four," Cage said. "There were some administrative headaches, of course, but overall they did a very good job with the integration."

NEXT: Changes For HP's PC Business

Ironically, the 10th anniversary of the HP-Compaq merger announcement comes just weeks after HP revealed that it was exploring "options" for its Personal Systems Group, a $40 billion division largely comprised of PCs. Todd Bradley, executive vice president of PSG, recently told CRN that he wants HP's board of directors to spin off the PC business quickly rather than sell PSG to another vendor.

While HP got many different assets of out of the Compaq purchase, one of the biggest assets was Compaq's enormous PC business. Compaq was the worldwide PC leader for several years before 2001 – when Dell's surging business began to take market share away from Compaq as well as HP and other major PC players. In fact, Dell had overtaken Compaq as the PC market share leader in the fourth quarter of 2001, according to market research firm IDC.

If HP does indeed leave the PC business behind, either by sale or spin-off, will it lead to second guessing about whether buying Compaq was the right move? Partners say no.

Lilien believes that regardless of what HP does with its PC business today, the Compaq merger was still a great move that dramatically changed HP. Plus, he said, HP will still have a strong enterprise product line, courtesy of Compaq. "I don't think it matters what happens to PSG. HP got a lot out of the merger," Lilien said. "The merger gave them such a big boost in Intel servers and storage, and it really propelled HP into the enterprise space."

Cage agrees, arguing that the Compaq merger not only gave HP valuable product lines and market share, but it also eliminated one of HP two largest competitors and allowed the company to go head-to-head with Dell. "What better way to increase your market share than by taking it from your top competitor?" Cage asked. "I don't think HP would be as strong today without Compaq."

Even though HP was in a heated rivalry with Dell in the PC market, Richie said Compaq's PC business was only a small part of the deal. "I don't believe the PC business was ever the reason HP bought Compaq," he said. "In the end, it was Compaq's enterprise products."

If HP does rid itself of the PC business, it will likely continue and even accelerate the trend the Compaq merger started 10 years ago of HP becoming more enterprise focused. And partners like Wald won't be sorry to see PSG split off from HP. "It's probably a good move for HP since PCs are commoditized these days," he said. "PCs just aren't strategic for us anymore."

Other partners, however, would like to see HP keep all its products under one roof rather than spin off its PC business. "I'd be sorry to sell them sell off the PSG business because we like getting everything from one source," Cage said, adding that Heartland sells PC, servers, switches, printers – pretty much everything HP has to offer.

Whatever the future holds for HP and its PC business, partners agree that the Compaq merger was a historic move that changed the IT industry.

"I think HP and Compaq proved that big technology mergers like that can work," Lilien said, "and can benefit partners."